An argument has broken out between Oil and Gas UK – the industry trade body – and an Edinburgh geologist over the future of North Sea oil. According to Professor Roy Thompson, the end is in sight and:
“The UK urgently needs a bold energy transition plan, instead of trusting to dwindling fossil fuel reserves and possible fracking.”
Against this, Deirdre Michie, CEO of Oil and Gas UK points to new technology, additional investment and:
“Nine new fields began production in 2016 and a further seven started producing in the first half of this year… A further 12 are due on-stream by the end of next year.”
How do we square these two opposing positions? Are we about to run out of oil, or are we just at the start of a new golden age?
Perhaps the best way to think about this is to use US oil analyst Art Berman’s tank analogy. Professor Thompson is referring to the total amount of water in the tank. Deirdre Michie is referring to the speed at which the tank is being emptied. Unless you find a means of adding new water to the tank, new technology, additional investment and drilling additional holes simply means that you are going to run out of water sooner than you otherwise would have done.
The fundamental problem for Oil and Gas UK is that oil takes millions of years to create, and only then under the correct pressures and temperatures and within relatively rare geological formations. So there is little chance of adding more water to the tank. Or, to put it another way, you cannot recover what isn’t there.
Worse still, as Thompson points out, the oil that remains is in smaller and harder to reach pockets, most of which is simply unprofitable to recover. Indeed, in this respect Thompson’s calculations are conservative. As we reported a few weeks ago:
“According to the BP Statistical Review of World Energy 2016, the UK has 2.8bn barrels of proved reserves (the amount of oil that can be profitably recovered; based on what the companies are legally obliged to report to the authorities rather than what they write in their investment brochures). For what it is worth, at today’s rates of production, that is somewhere between 7.5 and 8 years’ worth.”
In many ways, however, the price of oil is now as important than the size of the reserve. This is because – assuming we do not want the mother of all ecological catastrophes – we are going to have to clean up the mess when we have finished… and that is going to cost a lot of dosh.
The exact cost of cleaning up 470 platforms, 5,000 wells, 10,000km of pipelines and 40,000 concrete blocks that the oil industry has built in the North Sea cannot be known at this point – it has never been tried before. However, we can be reasonably sure that the industry (which still needs to attract investors and maintain the support of politicians) will have underestimated it. The industry’s conservative £40 billion price tag is widely expected to rise above £60 billion by the end of the process. That being so, the income from more than half of the oil that is left (around 1.5bn barrels) will be needed for decommissioning, leaving just 1.3bn barrels to cover industry costs and to reimburse investors.
My own belief is that the oil and gas industry intends doing to British taxpayers what the banking industry did back in 2008. They will walk away with the profits and leave the rest of us to clear up after them. Had previous governments followed the example of Norway and Saudi Arabia in setting up sovereign wealth funds based on the profits from oil, they might now be in a position to handle the cost of decommissioning; but they didn’t. So there are only two groups who will end up with the decommissioning bill after the oil runs out. One is the industry and its shareholders, the other is the government and its taxpayers… I know which I am going to bet on.